One of my favorite bloggers, Miserly Bastard, has posted recently on why he thinks gold is a bad investment. His post has inspired me to write about why I think gold is a good investment.
Readers of my old blog know that I am somewhat of a gold bug. I have been playing around in gold stocks, options, and futures (with disastrous results) for at least three years. By no means am I a doom and gloom guy, but I think that the arguments for owning some gold are very compelling. To frame my thinking on gold, I like to think of it as both a currency and an investment:
As a currency gold is
- The world’s oldest currency and store of value
- Impossible to create without digging it out of the ground – unlike Diamonds, real gold cannot be made in a chem lab
- Hedge against a falling USD and fiat currencies in general
- Hedge against inflation
- Gold pays an attractive and tax-defered yield (this is a leap of faith but I consider it to be true because of the contango in gold futures)
As an investment:
- Very strong demand for gold jewelry in India and China
- Asian central banks hold a tiny percentage of their reserves in gold. Any meaningful change in this policy will present a huge upward force to the gold price
- Gold bugs have a somewhat religious fervor for gold. If gold prices decline, there are lots of eager buyers
MB argues that the main reason he would own gold would be to protect against extremely unlikely economic situations “namely high inflation and/or rapidly weakening fiat currency.”
I don’t think either of these situations is extremely unlikely, in fact I think we’re experiencing them now and will continue to for some time. The government claims that inflation is 2% on an annualized basis. In my opinion, this number is a joke – the government cooks up the lowest possible number that they can reasonably get away with. Also, it’s in the government’s interest to have real inflation running at a much higher rate than reported inflation: it minimizes inflation-linked payments (Social Security & TIPS for example) and shrinks the real size of the outstanding debt.
As for MB’s second point, fiat currencies (especially the USD) have been weakening against hard assets for years. The forces causing this are secular in nature.
How I own gold:
In my medium-term cash management account, I keep about 20% invested in GLD. GLD is an ETF which holds a pile of gold in a warehouse somewhere.
As an investment/speculation I own gold stocks: GDX and AAUK. Gold mining companies can do really well when the price of gold rises but it’s not a guarantee. Lately, the cost of mining gold has risen, causing profit margins to fall.
My total exposure to gold is less than 10% of my networth.